The market has an uncanny way of lulling traders to sleep. Over the past month, the talk of a pullback was everywhere, but the market creeped higher. On each slight bout of selling, pullback chatter ensued again, but the market creeped higher. Negative news in Europe or Asia would send futures down 5 points overnight, but by the U.S. close, the market had creeped higher. Just an unrelenting creep higher.
So even though everyone seemingly expected a pullback, when the pullback finally came, most had given up on waiting around for it. When the pullback finally came, the VIX had its biggest 1 day percentage gain since November 2011. The “expected” pullback was clearly no longer expected.
Of course, yesterday’s move is only large because the starting point in the VIX was so low. To put into context the current VIX level, even after yesterday’s big move, here is the 1 year chart:
Though it is actually near the highs of 2013, it is still quite low relative to the past year of price action, and well below the 200 day moving average around 17.
Typically, when the market sells off from a new high like it did yesterday, the initial VIX spike on the first pullback is a sale. In other words, most of the time after such a strong momentum driven rally, we’ll see dip buyers step in on stocks on the first significant pullback, and the market will stabilize. In rare instances (like the flash crash selloff in 2010), there are no dip buyers who step in, and the market goes straight down from recent highs.
I have no clue what the end result of the current case will be, but one major clue is in how the other major macro markets behave. So far, the commodity market has been messy, but the currency, credit, and bond markets have been more orderly. If that changes, then this routine pullback could turn into a nastier, deeper selloff. For the moment though, I’m treating this as a garden variety pullback off stretched highs.
Markets overnight:
- Asian equities followed the U.S. into the red, with China the leader on the downside. The Shanghai Composite was down 3%, and the Hang Send was down almost 2%. Both indices are now up less than 2.5% on the year.
- European services and manufacturing PMI both missed expectations, sending European markets lower on the open, down 1.75% now.
- SPX futures down 0.4%, the dollar is mostly stronger, Treasuries are higher, and commodities are lower again.
- Wal-Mart reported better than expected results, but weak guidance, and the stock is unchanged in the pre-market.
- CPI and Jobless Claims data at 8:30 am EST. Existing Home Sales and Philly Fed at 10:00 am.